Inflation's rise may be too slow

Some economists believe it would aid America's recovery

New York Times

New York Times

Published 1:02 am, Sunday, October 27, 2013

FILE - In this Monday, June 3, 2013, file photo, Janet Yellen, vice chair of the Board of Governors of the Federal Reserve System, answers a question from a participant at the International Monetary Conference in Shanghai. President Barack Obama will nominate Yellen to succeed Federal Reserve Chairman Ben Bernanke at a pivotal time for the economy and the Fed's monetary policies. (AP Photo/Eugene Hoshiko, File) ORG XMIT: WX126

Inflation is widely reviled as a kind of tax on modern life, but as Federal Reserve policymakers prepare to meet this week, there is growing concern inside and outside the Fed that inflation is not rising fast enough.

Some economists say more inflation is just what the American economy needs to escape from a half-decade of sluggish growth and high unemployment.

The Fed has worked for decades to suppress inflation, but economists, including Janet Yellen, President Barack Obama's nominee to lead the Fed starting next year, have long argued that a little inflation is particularly valuable when the economy is weak. Rising prices help companies increase profits; rising wages help borrowers repay debts. Inflation also encourages people and businesses to borrow money and spend it more quickly.

The school board in Anchorage, Alaska, for example, is counting on inflation to keep a lid on teachers' wages. Retailers including Costco and Walmart are hoping for higher inflation to increase profits. The federal government expects inflation to ease the burden of its debts. Yet by one measure, inflation rose at an annual pace of 1.2 percent in August, just above the lowest pace on record.

"Weighed against the political, social and economic risks of continued slow growth after a once-in-a-century financial crisis, a sustained burst of moderate inflation is not something to worry about," Kenneth S. Rogoff, a Harvard economist, wrote recently. "It should be embraced."

The Fed, in a break from its historic focus on suppressing inflation, has tried since the financial crisis to keep prices rising about 2 percent a year. Some Fed officials cite the slower pace of inflation as a reason, alongside reducing unemployment, to continue the central bank's stimulus campaign.

Critics, including Rogoff, say the Fed is being much too meek. He says inflation should be pushed as high as 6 percent a year for a few years, a rate not seen since the early 1980s. And he compared the Fed's caution to not swinging hard enough at a golf ball in a sand trap. "You need to hit it more firmly to get it up onto the grass," he said. "As long as you're in the sand trap, tapping it around is not enough."

This has caused dismay among economists who see little benefit in inflation, and who warn that the Fed could lose control of prices as the economy recovers. As inflation accelerates, economists agree that any benefits can be quickly outstripped by the disruptive consequences of people rushing to spend money as soon as possible. Rising inflation also punishes people living on fixed incomes, and it discourages lending and long-term investments, imposing an enduring restraint on economic growth even if the inflation subsides.

"The spectacle of American central bankers trying to press the inflation rate higher in the aftermath of the 2008 crisis is virtually without precedent," Alan Greenspan, the former Fed chairman, wrote in a new book, "The Map and the Territory." He said the effort could end in double-digit inflation.

The current generation of policymakers came of age in the 1970s, when a higher tolerance for inflation did not deliver the promised benefits. Instead, Western economies fell into "stagflation" — rising prices, little growth. Lately, however, the 1970s have seemed a less relevant cautionary tale than the fate of Japan, where prices have been in general decline since the late 1990s. Kariya, a popular instant dinner of curry in a pouch that cost 120 yen in 2000, can now be found for 68 yen.

This enduring deflation, which policymakers are now trying to end, kept the economy in retreat as people hesitated to make purchases, because prices were falling, or to borrow money, because the cost of repayment was rising.